The unexpected death a few days ago of Nestor Kirchner deprived not only Argentina of a remarkable, albeit controversial leader. It also took away an exemplary figure in the Global South when it came to dealing with international financial institutions.

Kirchner defied the creditors. More importantly, he got away with it.

The Collapse

The full significance of Kirchner's moves must be seen in the context of the economy he inherited on his election as Argentine president in 2003. The country was bankrupt, having defaulted on $100 billion of its debt. The economy was in a depression, its gross domestic product having declined by over 16 percent that year. Unemployment stood at 21.5 percent of the work force, and 53 percent of Argentines had been pushed below the poverty line. What was once the richest country in Latin America in terms of per capita income plunged below Peru and parts of Central America.

Argentina's crisis stemmed from its faithful adherence to the neoliberal model. The financial liberalization that served as the proximate cause of the collapse was part and parcel of a broader program of radical economic restructuring. Argentina had been the poster child of globalization, Latin-style. It brought down its trade barriers faster than most other countries in Latin America and liberalized its capital account more radically. It followed a comprehensive privatization program involving the sale of 400 state enterprises -- including airlines, oil companies, steel, insurance companies, telecommunications, postal services, and petrochemicals – a complex responsible for about seven percent of the nation's annual domestic product.

In the most touching gesture of neoliberal faith, Buenos Aires adopted a currency board and thereby voluntarily gave up any meaningful control over the domestic impact of a volatile global economy. This system tied the quantity of pesos in circulation to the quantity of in-coming dollars. This policy, as the Washington Post writer Paul Blustein observed, handed over control of Argentina's monetary policy to Alan Greenspan, the U.S. Federal Reserve chief who was on top of the world's supply of dollars. This was, effectively, the dollarization of the country's currency.

The U.S. Treasury Department and its surrogate, the International Monetary Fund (IMF), either urged or approved of all of these measures. In fact, even with financial liberalization called into question in the wake of the Asian financial crisis of 1997-98, then-Secretary of the Treasury Larry Summers extolled Argentina's selling off of its banking sector as a model for the developing world: "Today, fully 50 percent of the banking sector, 70 percent of private banks, in Argentina are foreign-controlled, up from 30 percent in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in staying put."

As the dollar rose in value, so did the peso, making Argentine goods non-competitive both globally and locally. Raising tariff barriers against imports was not an option owing to the technocrats' commitment to the neoliberal tenet of free trade. Instead, borrowing heavily to fund the dangerously widening trade gap, Argentina spiraled into debt. The more it borrowed, the higher the interest rates rose as international creditors grew increasingly alarmed. Money began leaving the country. Foreign control of the banking system facilitated the outflow of much-needed capital by banks that became increasingly reluctant to lend, both to the government and to local businesses.

Backed by the IMF, the neoliberal government nevertheless continued to keep the country in the straitjacket that the peso-dollar currency board arrangement had become. As George Soros observed, Argentina "sacrificed practically everything on the altar of maintaining the currency board and meeting international obligations."

The crisis unfolded with frightening speed in late 2001, forcing Argentina to go to the IMF for money to service its mounting debt. After earlier providing loans, the IMF refused its pupil this time, leading to the government's $100 billion debt default. Businesses collapsed, people lost jobs, capital left the country, and riots and other forms citizen unrest toppled one government after another.

Kirchner's Gamble

When Kirchner won the elections for the presidency in 2003, he inherited a devastated country. He saw the choice as debt or resurrection, putting the interests of the creditors first or prioritizing economic recovery. Kirchner offered to settle Argentina's debts but at a steep discount. He would write off 70-75 percent, repaying only 25-30 cents to the dollar. The bondholders screamed and demanded that the IMF discipline Kirchner. Kirchner repeated his offer and warned the bondholders that this was a one-time offer that they had to accept or lose the rights to any repayment. He told the creditors that he would not tax poverty-ridden Argentines to pay off the debt and invited them to visit his country's slums to "experience poverty first hand." Faced with his determination, the IMF stood by helplessly and a majority of the bondholders angrily accepted his terms.

Indeed, Kirchner played hardball not only with the creditors but with the IMF. He told the Fund in early 2004 that Argentina would not repay a $3.3 billion installment due the IMF unless it approved a similar amount of lending to Buenos Aires. The IMF blinked and came up with the money. In December 2005, Kirchner paid off the country's debt to the IMF in full and booted the Fund out of Argentina.

For over two decades, since the Third World debt crisis in the early 1980s, developing country governments had considered defying the creditors. There had been a few quiet defaults on payments, but Kirchner was the first to publicly threaten the lenders with a unilateral haircut and make good on that promise. Stratfor, the political risk analysis firm, pointed out the implications of his high-wire act: "If Argentina walks away from its private and multilateral debts successfully—meaning it doesn't collapse economically when it is shut out of international markets after repudiating its debt—then other countries might soon take the same path. This could finish what little institutional and geopolitical relevance the IMF has left."

And indeed, Kirchner's act contributed to the erosion of the credibility and power of the Fund in the middle of this decade.

Recovery

Argentina did not collapse. Instead, it grew by a remarkable 10 percent per year over the next four years. This was no mystery. A central cause of the high rate of growth was the financial resources that the government reinvested in the economy instead of sending outside as debt service. Kirchner's historic debt initiative was accompanied by other moves to throw off the shackles of neoliberalism: the adoption of a managed float for the Argentine peso, domestic price controls, export taxes, sharply increased public spending, and caps on utility rates.

Kirchner did not confine his reforms to the domestic sphere. He undertook high-profile initiatives with other progressive leaders in Latin America, such as the sinking of the Washington-sponsored Free Trade of the Americas and efforts to bring about greater economic and political cooperation. Emblematic of this alliance was Venezuela's $2.4 billion purchase of Argentine bonds, which enabled Argentina to pay off all of the country's debt to the IMF.

Along with Hugo Chavez of Venezuela, Lula of Brazil, Evo Morales of Bolivia, and Rafael Correa of Ecuador, Kirchner was one of several remarkable leaders that the crisis of neoliberalism produced in Latin America. Mark Weisbrot, who captured his continental significance, writes that Kirchner's moves "have not generally won him much favor in Washington and in international business circles, but history will record him not only as a great president but also as an independence hero of Latin America."

Walden Bello is a member of the House of Representatives of the Philippines, a senior analyst of Focus on the Global South, and a columnist for Foreign Policy In Focus. He can be reached at waldenbello@yahoo.com.

RECOMMENDED CITATION:

Walden Bello, "Defy the Creditors and Get Away with It" (Washington, DC: Foreign Policy In Focus, November 3, 2010)

(2) Iceland better off than Ireland, because it did not bail out the banks - Paul Krugman

Most people know Swift as the author of "Gulliver's Travels." But recent events have me thinking of his 1729 essay "A Modest Proposal," in which he observed the dire poverty of the Irish, and offered a solution: sell the children as food. "I grant this food will be somewhat dear," he admitted, but this would make it "very proper for landlords, who, as they have already devoured most of the parents, seem to have the best title to the children."

O.K., these days it's not the landlords, it's the bankers — and they're just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what's happening to Ireland now.

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody's fault but their own. But, no, the Irish government stepped in to guarantee the banks' debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation's creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they're bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks' debts, the Irish are suffering from plunging incomes and high unemployment.

But there is no alternative, say the serious people: all of this is necessary to restore confidence.

Strange to say, however, confidence is not improving. On the contrary: investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness.

Now what? Last weekend Ireland and its neighbors put together what has been widely described as a "bailout." But what really happened was that the Irish government promised to impose even more pain, in return for a credit line — a credit line that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.

Does it really have to be this way?

In early 2009, a joke was making the rounds: "What's the difference between Iceland and Ireland? Answer: One letter and about six months." This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn't be compared with the utter disaster that was Iceland.

But at this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland's, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland's debt safer than Ireland's. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — "private sector bankruptcies have led to a marked decline in external debt." Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland's exports more competitive, has been an important factor in limiting the depth of Iceland's slump.

None of these heterodox options are available to Ireland, say the wise heads. Ireland, they say, must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers' sins is worse than a crime; it's a mistake.

Now across Europe the great blame game will rumble back into play. Our banks, your banks, their banks, or is it your feckless householders or ours, certainly can't be theirs, they're still doing well in Germany. Expect lots more national stereotypes to be wheeled out for ritual defamation.

So let's ask who it was took a dump in Ireland?

First, the suspects.

Ireland has three big insolvent banks and several other smaller, equally insolvent financial institutions we won't bother to mention by name.

Ireland also has a large number of subsidiaries of European, British and American Banks.These subsidiaries are often registered as Irish and therefore on Ireland's tab not the nation of the parent bank. This often gets forgotten in the excitement. But it is KEY.

Ireland also houses a very large chunk of the world's Special Investment Vehicles (SIV's) which are the shell companies which house trillions and trillions of dollars and Euros and pounds worth of Collateralized Debt Obligations (CDOs). These are what Warren Buffett described as "weapons of financial mass destruction'" And they are in their own way as hard to find and disarm as the ones we had a fraudulent war over. Anyway I digress.

These CDOs, in turn, house an equal or greater nominal value of Credit Default Swaps (CDS) written upon the CDOs. I can't tell you the figures because only the Irish Stock exchange has the otherwise completely confidential paper work and I have serious doubts (from what I have been told in the last week by an insider with first hand knowledge) that the Irish regulator and stock exchange have much of a clue themselves.

So, to the crime.

Some of this will, for legal reasons have to be done in generalized terms with names left out to protect the Innocent - me. But to start with let's be reasonably specific. Germany was and is very very angry with Ireland for ruining its banks. That is what a German banker told me this week. She spoke on the guarantee of anonymity as she would suffer all sorts of legal problems if she was identified. I am sorry that this leaves you just having to trust that I'm not just making this up, but I hope many of you know me well enough to go with it.

In fact it was rumoured in German banks that at the time of the collapse of Hypo Real Estate, an angry call was made from the German Premier to the Irish, to complain, to which the answer was ... well it was short. Now this is nothing but a rumour. But it was a rumour in Germany which indicates that some in Germany were and perhaps still are very angry and blame Ireland.

So are they right in their blame?

The same banker told me this. She was aware of instances, and so was everyone else, of banks, German banks, who used to fly their people from Germany to Ireland in order to do deals that were not allowed in Germany.

German banks set up subsidiaries in Ireland. These subsidiaries were often registered as completely Irish companies. Back in Germany the German regulator (BaFin) had strict and enforced rules. Very good rules for the most part. Far, far better than Britain or Ireland. But these good rules, properly enforced meant German banks could not do many of the most lucrative and in hind sight reckless kinds of deals.

So the German banks would do the figures and work it all out in Frankfurt, then send a banker over to Ireland, get them to sit at 'their' desk in Ireland, in the Irish bank, and do the deal there. The legal registration of the deal and the 'oversight' were all Irish. This is known in the financial world as jurisdictional arbitrage. You and I would call it cheating if we were feeling charitable and lying if we weren't.

The Banker flies back to Germany, where the German bank hasn't done any deal, and therefore has done nothing wrong. The deal was properly overseen and approved by the appropriate Irish financial authorities and the profits would be banked at a very happy Irish bank. If any management of the 'deal' was required an Irish company would be hired, there are many, and an Irish manager often living not far from Cork, would 'manage' the money in and out. I have spoken to such people. Usually I can hear the sweat coming off them as they ask how I got their number and where did I get my information. To which I would reply that the Internet is a very large place and never, never forgets.

Now my question to you is this. If it's a German bank and a German banker doing the deal is it Germany who made the mess? Or, equally justified, if the deal was actually done in Ireland in an Irish company allowed and no doubt welcomed by Ireland's financial world, and overseen by Ireland's wonderful regulators, is it Ireland who made the mess?

Should Germany, have pulled the plug on this racket? Should Ireland? Whose losses when they finally came, are they?

If the bank is registered in Ireland as an Irish bank/business, then the loss is on Ireland's tab. Depfa was an Irish bank. Just months before its collapse in 2007 it was bought by Hypo, a German bank. Had that not happened the ?180 billion euro loss at Hypo Real Estate would have been Ireland's loss, dwarfing all other losses. Why was Hypo Real Estate bought by Germany at that moment?

I can't say for sure. But think about this. Sachsen Landesbank collapsed due to around $30-40 billion in bad sub prime loans its Irish subsidiary called Ormond Quay had made in the U.S. OrmondOrmond's collapse caused the immediate collapse of one of Germany's Landesbanks. Which suddenly sent ripples of fear through all the other Landesbanks as the world woke up to the rampant idiocy that the Landesbanks had been getting up to ...in Ireland.

Germany had to step in and bail Sachsen out. Now lets think about Depfa. Depfa started life as a German bank. It became listed in London and then in 2002 moved to and registered itself in Ireland in the newly set up IFSC (Irish Financial Services Centre) This was like a legal gated community or financial maquiladora. The IFSC was in many ways supposed to be the regulator of what went on in its grounds. I leave you to decide how well it must have done.

By the way the IFSC was created by Dermot Desmond with the help of Charles Haughey.

So Depfa is now an Irish registered bank. But it has very close ties to Germany and many German banks and landesbanks. If ever Depfa went down it would certainly have plunged a vast swathe of German banks and landesbanks into a storm of insolvency, that would have dwarfed the fall out from SachsenLB. . Depfa must not be allowed to go down.

So when in 2007 Depfa was suddenly bought by Hypo Real Estate was it because news of financial problems hadn't reached Germany and they bought it because they thought it was a great deal and were cheated by those crafty Irish? OR might Germany have known that a massive crisis was ticking away in Depfa and could see the clock was running down close to zero hour, and realized that if left in Ireland it would not, could not be rescued by Ireland and so would be left to start a chain reaction that would move straight to Germany? If they thought the latter, do you think it likely that Germany would have just said "Oh Scheisse" and sat waiting for Armageddon, or do you think they would have taken emergency action to bring Depfa under German ownership and jurisdiction where German pockets were deep enough to bail it out and thereby save the rest of Germany's banking system?

You decide.

So let's return to our question? Whose fault? Would Germany be right to be bitter about Depfa/Hypo and others? Or does the blame lie with the Germany banks and Bankers who flew to Ireland to do their mess? Is it Ireland's banks mess or Germany's? I don't think we can disentangle the blame.. maybe when the Irish Banks' books are finally opened we could. But I bet you no one outside the top bankers and politicians, the people who oversaw the creation of the bomb in the first place, will ever be told what's really in there.

I can't say and neither can you, if the losses are Irish or German. But we can say, the losses never were, and should not ever be, yours and mine. We, the people, who were told nothing, were not asked nor consulted, whose laws were either ignored, set aside or re-written, we should not be expected to pay for those losses now.

They are bankers losses. It is NOT a question of Irish or German. It is question of wealthy bankers from all countries not just Germany (almost every nation, Germany, America, Russia, France Britain, we did dirty work in Ireland) and their corrupt Irish helpers versus the people. It is not a question of should the Irish people or the German people pay. Neither people should. It should be the bankers who made the losses who should take them.

DO NOT allow the bankers to set us against each other as a cover for their crime and guilt.

For anyone interested in a very different take on the financial crisis, the failure of the policy of bailing out the banks and what it means for us, the book, The DEBT GENERATION is now finished and shipping.

Irish banks soared in Dublin trading as the government said it will make junior bondholders pay some of the cost of the 35 billion-euro ($46 billion) rescue package.

"The risk of immediate shareholder-dilutive wipe-out has been averted," Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, wrote in a note to clients today.

Bank of Ireland Plc, the country's largest lender, soared 16 percent to 30.7 euro cents at the 5:10 p.m. close of trading, while Allied Irish Banks Plc, the second-largest, gained 3.8 percent to 35.5 cents and Irish Life & Permanent Plc surged 59 percent to 81.9 cents. The five-member ISEQ Financial Index is still down about 98 percent from its peak in February 2007.

Finance Minister Brian Lenihan told state broadcaster RTE the government needs to impose "big haircuts" on banks' junior bondholders after the rescue. Ireland met its two-year-old pledge that senior bondholders, typically the last investors to lose out when a bank or company founders, wouldn't lose money.

There "wasn't political or institutional" support in Europe for forcing losses on to senior bondholders, Prime Minister Brian Cowen told reporters in Dublin yesterday after European Union finance ministers backed the plan at a meeting in Brussels. Existing legislation requiring subordinated bondholders to share the costs can be used in "wider application," he said.

Bank of Ireland Bonds

Bank of Ireland's 1.47 billion euros of senior floating- rate notes due September 2011 rose 8.25 cents on the euro to 91.6 cents, a 10 percent increase, at 4:22 p.m. in London, according to composite prices compiled by Bloomberg. Allied Irish's 1.5 billion euros of senior floating-rate securities due in September 2011 climbed 8.2 cents to 87.7 cents, a 10 percent rise, the data show.

"It is positive for senior debt holders, as any burden-sharing at senior level was deemed by EU authorities to potentially jeopardize EU-wide financial stability by imposing unsustainable wholesale borrowing costs on weaker peripheral banks," said Jose Mosquera, who manages $41 million as a Madrid-based asset manager at Breogan Global Financial Fund.

Ireland will receive 67.5 billion euros in total from the European Union and International Monetary Fund, Cowen said. The government will meet about half the cost of the 35 billion-euro banking bailout from its own resources, including the National Pension Reserve Fund. ...

(5) Irish want the State to default on debts to bondholders in the banks

The problem in Ireland really isn't so much the state's deficits—rather, it's the state's guarantees of the Irish banks. That is what led to this mess. Yes, the Irish public sector is bloated, but it's the banks that are busting the fiscal budget.

A SUBSTANTIAL majority of the Irish people wants the State to default on debts to bondholders in the country's stricken banks, according to a Sunday Independent/Quantum Research poll.

The finding that 57 per cent favour and 43 per cent oppose default reflects a growing view among policymakers and opinion formers that the State simply cannot support the debt burden it has taken on.

The telephone poll of 500 people nationwide has also found that a majority of around two-thirds opposes the headline measures in the Government's four-year plan.

Following Fianna Fail's loss of the by-election in Donegal last week, the findings will add to political uncertainty as an austerity Budget approaches on December 7.

As Ireland awaited the fine details of the international bailout, which are expected tonight, it was learned last night that the Irish delegation negotiating with the EU-IMF last week raised the issue of default.

"The Europeans went completely mad," a senior government source said.

Government sources have also denied an RTE News report on Friday that the average annual interest rate on the ?85bn EU-IMF bailout would be 6.7 per cent.

Last night the Minister for Finance, Brian Lenihan, told this newspaper that such an interest rate was "not acceptable to me".

But whatever interest rate is eventually agreed -- it is expected to be closer to 6 per cent -- the State will be burdened with a colossal annual interest payment of around ?5bn over nine years, if or when the bailout is drawn down.

This effective doubling of the interest payments that are already being made has helped to convince the public here that there must now be a default on a portion of the debt -- specifically, the portion lent to Irish banks, including senior bonds.

If that was to happen, it would be likely to cause a severe shock to the financial system worldwide and raise the risk of an international meltdown. However, advocates of a default say it is no longer in Ireland's national interest to prevent senior bondholders taking a hit.

The argument goes that a bailout from the EU-IMF will effectively neutralise the argument that default on bank bonds would cause investors to stop lending money to the Government.

If Ireland is forced to default, there is a view that it should happen after the financial system has been restabilised, reformed and restructured, so that it can absorb the losses without the risk of meltdown.

Yesterday, around 50,000 people took to the streets of Dublin to register their opposition to the Government's four-year plan to cut the budget deficit to 3 per cent of GDP by 2014.

The huge turnout -- in spite of atrocious weather -- is an indication that the measures announced by the Government last week are meeting with the disapproval of the public. ...

Nonetheless, the German Chancellor Angela Merkel will this week intensify her lobbying for reforms tying debt holders to sovereign bailouts, despite concerns that she is further unnerving investors.

In her latest intervention last week, Ms Merkel invoked what she referred to as "the primacy of politics" over the "limits of the markets".

She has said that she wants bondholders to take a hit on the value of their holdings when a country is in trouble, potentially saving taxpayers billions of euro.

The German Chancellor's insistence on raising the issue at this time may be populist and of benefit to a resurgent Germany, but it is causing near panic in the financial markets.

In Dublin, there is barely concealed outrage at the interventions of Ms Merkel and at the position adopted recently by the European Central Bank, which precipitated the arrival of the EU-IMF team in Ireland.

"The ECB f**ked us," one government official in Dublin was reported yesterday to have said.

With calls for a bailout of Portugal intensifying and worries about Spain, Italy and even Belgium growing, the German Chancellor is keen to show her domestic audience that once the febrile mood is calmed, there will be an orderly mechanism for dealing with a repeat situation.

So a week ago as I write this, the Irish formally asked for a bailout from the European Union, acting in concert with the International Monetary Fund and the British government.

And now, a week after that request, the EU finance ministers just approved the bailout of the Republic of Ireland—

—however ... However, in those seven days in between, a serious shitstorm broke out in Ireland—it has been one hell of a week, over there in the Emerald Isle.

And though the bailout has been approved by the EU finance drones, we still do not have an approval from the most important player of them all:

The Irish people.

Let's recap:

On Monday, immediately after the announcement that the Irish government had formally asked for the bailout, the Greens—partners of Prime Minister Brian Cowen's Fiana Fáil party—left the governing coalition, forcing Cowen to call for an election in January.

The Green's leader, John Gormley, isn't stupid: He knows that, in politics, association is the very definition of guilt—and the Greens are guilty of having been in bed with Cowen. So Gormley and the Greens want to put as much daylight between themselves and Fiana Fáil before the election.

Even members of Cowen's own party are trying to put distance between him and them—they're openly calling for his resignation. That's gotta hurt. ...

The key date that's coming up insofar as Ireland is concerned is December 7: "A date which will live in infamy!" really is living up to its moniker, because that's the day the Irish are supposed to pass their budget—their budget with the EU/IMF bailout conditions: The Austerity Budget.

Now, here's a question—the obvious question:

What if the Irish can't—or won't—pass the austerity budget?

What if the Irish don't take the bailout?

Cowen's government is teetering—the Greens could just as easily go back on their word and reject the austerity budget—or any of the other coalition parties could walk out—Sinn Féin wants no part of any IMF austerity deal—hell, just a couple of Fiana Fáil's own MP's could bolt and wreck Cowen's parliamentary majority— ...

Clearly, Fine Gael realizes the mine field they're traversing. They are pro-Europe, but they are Irish politicans too—with seats they have to win, and constituents they have to appease.

If push comes to shove, will they jump to the Irish side, or jump to the European side?

The question is no question at all—it's obvious: They'll jump to the Irish side. Fiana Fáil took the beating it did in Donegal because of the widespread perception that they're the IMF's lackeys—Fine Gael isn't going to make that same mistake. Not with the noises Noonan is making on their behalf.

Therefore, the next week will be crucial, in Ireland. The next week could likely decide the fate of the Eurozone. ...

What happens in the streets of Ireland will likely not be the deciding factor in the continuation of the EU and the Eurozone; not in my estimation. I still think, as I have argued, that Spain is the key to the Eurozone's survival.

But if the Irish reject the austerity budget on December 7, it is obvious that the Spanish problems will come to a head a lot faster.

An Irish rejection of the bailout would send the bond markets into a frenzy—Spanish debt would immediately come under pressure, likely crashing before Christmas. Italy would come immediately next. The whole Eurozone could be ablaze by the New Year's.

Therefore, the EU needs to make the December 7 budget vote go smooth—they need to pull out all the stops and make the Irish understand the situation. They need to make them see the wisdom of making sacrifices for the well being of British and German banks.

After all, as everyone knows, the Irish have always loved the British. And the Germans.

By Marshall Auerback, a hedge fund manager and portfolio strategist who writes for New Deal 2.0.

Despite a blame-a-thon on Ireleand, Germans banks are really at the core of the eurozone catastrophe.

Much ink has been spilled in the press over the Irish problem and the laxity of the country's southern Mediterranean counterparts in contrast to the highly "disciplined" Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany's bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble.

One of the traditional rationales for the creation of the euro was that a single currency and strict Maastricht criteria would keep the profligate Mediterraneans and their Celtic equivalents in line. Instead, critics, particularly in Germany, increasingly see the European Monetary Union as a means for freeloading nations to offload their liabilities onto fitter neighbors.

Not surprisingly, this has engendered much discussion that perhaps it would serve Germany's interests to leave the euro, rather than booting one of the Mediterranean "scroungers" out. But as Simon Johnson has pointed out, this comforting narrative of German prudence matched up against Irish profligacy doesn't really stack up:

German banks in particular lost their composure with regard to lending to Ireland — although British, American, French and Belgian banks were not so far behind. Hypo Real Estate — now taken over by the German government — has what is likely to be the highest exposure to Irish debt.

But look at loans outstanding relative to the size of their domestic economies (using the BIS data on what they call an "ultimate risk basis").

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. [my emphasis]

Where were the German regulators? As my colleague Bill Black has noted:

They seem to have believed that ‘What happens in Vegas (Dublin) stays in Vegas (Dublin).' Instead, their German banks came back from their riotous holidays in the PIIGS with BTDs (bank transmitted diseases). The German banks' regulators continue to let them hide the embarrassing losses they picked up on holiday, but that cover up will collapse if any of the PIIGS default. The PIIGS will default if the EU does not bail them out, so there will be a bail out even though the German taxpayers hate to fund bailouts.

German banks' relatively high exposure to Ireland does pose the question as to whether there is some wild, Weimar-style hyperinflationista lurking deep in the heart of every German, only able to express itself fully when away from the prying eyes of fellow citizens.

All of the rescue plans that have been introduced in Ireland or Greece thus far rest on the assumption that, with more time, the eurozone's problem children could get their fiscal houses in order — and Europe could somehow grow its way out of trouble. But the fiscal austerity being offered as the "medicine" is turning out to be worse than the disease. It has exacerbated the downturn and unleashed a horrible debt deflation dynamic in all of the areas where it was reluctantly implemented.

But here's the thing: these fiscal straitjackets obscure the history of how we came to today's horrible impasse and, more specifically, the German banks' role in helping to fuel the credit binge. Also lost is the reason why this has metastasized into a far greater crisis: as part of the eurozone, Ireland does not have the fiscal freedom to come up with a sufficiently robust government response. The UK had a comparable real estate bubble in the late 1980s, which culminated with the Soros attack on the pound in 1992 and the ejection of sterling from Exchange Rate Mechanism (the precursor to the EMU). This was a blessing in disguise. Withdrawal from the ERM saved the UK because it allowed the country sufficient latitude to reflate. Yes, the country had a major recession (in many ways a consequence of the surrender of fiscal freedom as a result of joining the ERM in the first place), but there was never a systemic risk that posed a threat to the country's overall solvency as is the case in Ireland today. And this is exacerbating the problem in Ireland because it persists in chasing its tail repeatedly with futile fiscal austerity measures.

The truth of the matter is this: the eurozone seems rotten to the core, literally. Germany represents that core. The Germans might occupy the penthouse suite, but it is the suite of a roach motel. And we know what happens to those who enter such "establishments."

Yes, longer term the problems currently afflicting the eurozone could be sorted via the creation of a supranational fiscal authority — a "United States of Europe". But with each crisis (Ireland today; Portugal and Spain tomorrow; Italy and then France next?), the political forces are coalescing in a radically different direction. The Germans are becoming increasingly resentful as they perceive their country as the bailout mechanism of last resort (even though the Irish experience suggests that their bankers are also guilty of many of the same excesses as the "Celtic Tiger"). The PIIGS themselves are seeing that the benefits of euro membership have been vastly overstated and in fact now act as a cancerous influence through the Germanic embrace of austerity. (Paradoxically, it has been the "profligate" behavior of those so-called lazy Mediterraneans that has enabled Germany to retain its export-driven model, as well as allowing it to run lower budget deficits than most other countries.)

The eurozone could ultimately end up like Yugoslavia writ large. Prior to the break up of that country, the relatively rich republics, Slovenia and Croatia, resented policies that transferred wealth to the poorer republics like Serbia, Macedonia, Montenegro, or the autonomous region of Kosovo. Once Tito's organizing genius disappeared, the links stitching the country together became frayed and eventually snapped as old grievances manifested themselves in newer forms. The same could happen to the Europe Union if it underwent a supranational fiscal union — the beginnings of which are already in evidence. I think the Germans are beginning to recognize that, which is why there is discussion about leaving the euro.

But let's first be clear: German Chancellor Angela Merkel has persistently argued that it is essential that private investors, notably the bond holders, begin to suffer losses so that they will have the proper incentives to provide effective "private market discipline" going forward. She has further argued that it is fair that they suffer losses, given the premium yields they received and their lack of due diligence. That's an honorable policy. But it's like the old Irish joke of the driver who gets lost, asks for directions, and is told, "Well, I wouldn't be starting from here." By the same token, Ireland clearly illustrates that German banks, as well as their Mediterranean counterparts, would be big losers under the Merkel proposal. Ironically, German financial institutions could find themselves subject to the same kinds of bailouts that Chancellor Merkel and many of her counterparts in Berlin are urging on the Irish and Greeks. ...

About Me

'Mission statement'.
I am convinced that jewish individuals and groups have an enormous influence on the world. The MSM are, for almost all people, the only source of information, and these are largely controlled by jewish people.
So there is a huge under-reporting on jewish influence in the world.
I see it as my mission to try to close this gap. To quote Henry Ford: "Corral the 50 wealthiest jews and there will be no wars." `(Thomas Friedman wrote the same in Haaretz, about the war against Iraq! See yellow marked area, blog 573)
If that is true, my mission must be very beneficial to humanity.